Positioning for Successful M&A Exit

As many people are aware, Google acquired Nest Labs, the market leader in smart thermostats and smoke detectors, last year for $3.2 Billion. This resulted in a huge payday for the Nest executive team and their investors.

Most startup executive teams can only dream of such an outcome for their startup. Nevertheless, the Nest story is a great case study on how to best position your company for an exit.

5 Market Exit Positioning Lessons You Can Learn from Nest

Here are five key takeaways that startup and expansion-stage companies can learn from Nest’s market exit success story:

1) Understand Your Product Ecosystem

Nest’s management team knew its product ecosystem and had a clear vision for where the smart home movement was going several years ahead of the market. They strategically chose the most logical appliances in the house that people would want to control and interact with from afar:

A smoke detector to ensure safety of their house.

A thermostat to save money on energy bills.

This made Nest’s product attractive in terms of being at the gateway of the smart home beyond the smart living room. They also realized the value of the data they were collecting via these devices and knew that this opened up a key potential acquirer segment in a search engine like Google (who is always trying to improve its knowledge about you so that it can better position ads).

By being vigilant and aware of their potential acquisition targets, the Nest executive team was able to play up to them and make their business an attractive acquisition option for a number of companies in different spaces. This also helped ensure that there would be an attractive alternative option to going public when the time came.

2) Stay Focused On and Dominate What’s Working Before You Look to Expand

Narrow market focus lowers risk for the acquirer and makes your company much easier to fold into their business. Google saw Nest as a very attractive smart home technology target because it was the only startup of its type to really gain widespread adoption of a device. It was clear that Nest realized the importance of getting their primary device’s interface right in order to open up the opportunity to introduce other smart appliances into their customers’ homes further down the line.

3) Understand Your Target Acquirer’s Vision

The Nest executive team knew that one of Google’s main growth strategies is to be the central player in the smart home ecosystem, and that on a broader level it sees the greater Internet of things (IOT) market as a key target in its roadmap. Consequently, Nest knew proving that it had a robust application interface for individuals to interact with its smart thermostat and smoke detectors was key to attracting interest from Google and other acquirers.

4) Know When You Have the Upper Hand and Leverage it to Your Advantage

Nest’s executive team knew that many blue chip players were interested in its technology, so publicly opening up to another large round of financing put pressure on these companies to acquire the company now or potentially face an even bigger premium down the road. That kind of move can also scare away potential acquirers, but is a great way to drive up the premium on your sale price. Nest had enough interest on the table that causing acquires to balk wasn’t a real risk.

5) Identify an Acquirer that Will Fit Well with Your Corporate Culture

You are making the decision to sell your company for the whole company, not just the shareholders. You owe it to the individuals who have worked so hard to help the company realize this milestone. The Nest management team always had this commitment in mind, and knew that the company’s culture would fit in well as a division of Google.

Putting These Market Exit Positioning Lessons into Action

It is never too early to start thinking about market exit positioning. Even if you are just getting started, knowing who your potential buyers may be and the levers that typically trigger acquisitions in your space can be extremely valuable knowledge. It may even cause your management team to re-think critical product decisions or evaluate who to target as potential partners, as these decisions can alter the interest your targets might have in acquiring your company.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 40 professionals serving more than 100 companies throughout the region.